Quantitative Methods of Evaluating Businesses and Investments - Time Value of Money

In addition to being able to understand the financial statement, IAs must also have the ability to estimate the value of an investment in the future.

Future ValueWhen planning investment strategy, it's useful to be able to predict what an investment is likely to be worth in the future, taking the impact of compound interest into account. This formula allows you (or your calculator) to do just that:

Pn = P0(1+r)nPnis future value of P0P0 is original amount investedr is the rate of interestn is the number of compounding periods (years, months, etc.)

Note in the example below that when you increase the frequency of compounding, you also increase the future value of your investment.

Present ValueAs part of your investment planning, you might also need to calculate the present value of investments. For example, if your clients want to retire with $1 million in their investment accounts, it would be useful to know how much they need to save each year to reach that goal.